Journal
EUROPEAN ECONOMIC REVIEW
Volume 49, Issue 3, Pages 531-560Publisher
ELSEVIER
DOI: 10.1016/j.euroecorev.2004.09.002
Keywords
asset prices; economic uncertainty; growth rates
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In this paper we show that measures of economic uncertainty (conditional volatility of consumption) predict and are predicted by valuation ratios at long horizons. Further we document that asset valuations drop as economic uncertainty rises-that is, financial markets dislike economic uncertainty. Moreover, future earnings growth rates are sharply predicted by current price-earnings ratios. It seems that much of the variation in asset prices can be attributed to fluctuations in economic uncertainty and expected cash-flow growth. This empirical evidence is consistent with the implications of existing parametric general equilibrium models. Hence, the channels of fluctuating economic uncertainty and expected growth seem important for interpreting asset markets. (C) 2004 Elsevier B.V. All rights reserved.
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